Accountancy Partner's Blog

What is IR35 and does it apply to me?

Tuesday, December 18, 2018

Are you a contractor? IR35 is common word for tax legislation, which may affect you. It affects people who are sole employees of limited companies who
are personally responsible for generating all of their company income.

Did you know there are two ways to run a limited company? These are: ‘Outside the scope of IR35’ and ‘inside the scope for IR35’. These are both very different
from each other. A company can operate under both methods at the same time but the rules should be applied correctly for both methods.

Companies that operate outside the scope usually trade on their own account. The Company must prove that there is little or no control over the contractor
regardless of what the industry believes. The contractor should be able to perform the work on their own and if not employ someone to help them or
to do it for them. It is important that the right substitution is allowable due to it being an important test of being outside the scope of IR35. However,
there are other tests that also should be followed if a company wants to legally operate outside of IR35. For more information on this and to check
your employment statues click the following link:

https://www.gov.uk/guidance/check-employment-status-for-tax

As you can see this unfortunately makes it difficult for an agency worker to claim to be outside of the scope. This has been the case for a few years now
and will still affect you if you are a Limited company and if you’re not.

In contrast, working in the scope of IR35 is very different. A positive is that agency workers can be engaged much more and feel more involved. The best
thing is maintaining compliance for the limited company owner. That is just a fancier way of saying to pay the right level of tax. The income cannot
at all be taken in the form of dividends and the company employing the contractor are liable for the company National Insurance Contributors and the
contractors personal NIC’s. This is usually the part when problems begin to take place. Agency workers can no longer claim to be outside the scope
and they will fall inside the scope either. This is because they will always fall under the direction of the client and will not have the right to
substitution.

Now for the next hurdle- how is the Revenue going to police this? They have placed the onus onto the client to determine the tax status of a contractor
to begin with. Unfortunately this means that all contractors working through a third party must be inside the scope of IR35. This will cause a huge
issue for the transport sector because of the extra tax liability of being inside the scope of IR35. To put this into context, if a limited company
turns over £36,000 a year. Annoyingly, this means an annual tax bill of around £6000 to £8000 a year.

Philip Hammond, The Chancellor made it very clear in the Autumn Statement that the Government wish for that people doing similar jobs should pay similar
amounts in tax. Failure to adopt these rules correctly will very likely end with a substantial tax bill.